New RAF board faces threat of being declared delinquent

Just a few months into its tenure, the new board of the Road Accident Fund (RAF) is facing the threat of being declared delinquent after failing to reverse the decision of the previous board to institute litigation against the Auditor-General (AG).

The legal action centres on the appropriate accounting standard to be used to prepare its 2021/22 financial results and the board’s rejection of directives the fund was given not to proceed with this litigation.

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RAF board chair Zanele Francois told Parliament’s Standing Committee on Public Accounts (Scopa) last month the new board, which was appointed on 1 October 2023, had found no compelling reasons to change the previous board’s decision to institute litigation against the AG.

Scopa was told the case was heard before a full bench of three judges in the High Court in Pretoria over three days from 30 January to 1 February 2024, with judgment reserved, which prompted severe criticism of the RAF board.

All authorities are wrong?

Scopa chair Mkhuleko Hlengwa asked Francois several times if it was the position of the RAF board that the AG, National Treasury, Accounting Standards Board (ASB) and the Office of the Accountant-General (OAG) were all wrong about the accounting standard adopted by the RAF.

Francois ducked this question each time and claimed she was unable to speak on behalf of the RAF board on the issue because this question had never been posed formally to the board.

Hlengwa believes the RAF board members, without applying their minds properly, allowed the RAF’s executive to go ahead with court action because, if they had in fact applied their minds to this issue, the RAF board chair would have confirmed that they disagreed with these entities.

He suggested that Scopa institute action to declare the RAF board members delinquent directors for this “fishing expedition” of oversight by the courts.

Attempts by Moneyweb over the past 10 days to obtain further comment from Hlengwa on action to declare the RAF board delinquent have been unsuccessful.

Comment has also been requested from the Department of Transport but has not yet been received.

Unilateral change of accounting standard

The RAF unilaterally changed its accounting standard in 2021 from the International Financial Reporting Standards (IFRS) 4 to the International Public Sector Accounting Standards (IPSAS) 42, which means the RAF prepared its financial results as a social security fund rather than an insurer.

The change resulted in its liabilities for outstanding claims plummeting from R331 billion in 2019/20 to R34 billion in 2022/23.

It also led to the RAF receiving a qualified audit opinion from the AG for its 2021/22 and 2022/23 financial results for not fairly presenting its financial position at the end of these periods.

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Hlengwa told Scopa the change in the RAF’s accounting standard had “sanitised its liabilities”.

Francois said the new board had found no compelling reasons to change the previous board’s decision to institute litigation against the AG because:

  • It was in the best interest of the RAF and the users of its financial statements, given that the matter was of an accounting nature. The change seeks to correct the historical error of the miscalculation of the RAF claims liability, based on an accounting standard meant for insurance companies, when the RAF was not an insurance company but a social benefit fund.
  • This error had led to a fundamental misrepresentation of the RAF’s financial statements and the effect of that accounting treatment over the years had ensured that the liabilities of the fund were overstated, thereby fundamentally misrepresenting the financial position and statements of the RAF.
  • IFRS 4, the accounting standard the RAF was expected to use, was an international accounting standard similar to IPSAS 42, which was currently in question.
  • The Generally Recognised Accounting Practice (GRAP) reporting framework, which was expected to be applied by all government departments and entities, allowed for the use of an international standard in the absence of a relevant standard. The reporting framework also provided that management should use its judgement in developing and applying an accounting policy that results in reliable financial statements.
  • The board had to satisfy itself that the decision complied with the prescribed accounting framework within government.
  • The board had satisfied itself that the RAF management had consulted extensively with the AG and OAG, including the ASB, at the time in an attempt to comply with GRAP 3 and ensure that professional advice on the matter was sought. However, the mediation process failed, with the AG walking out of that process, leaving the RAF with no option but to seek an independent arbitrator, the courts.

ANC MP Sakhumzi Somyo said the current RAF board showed reluctance to review the decision of the previous board because it claimed there was no compelling reason to reverse the previous board’s decision – but they should be held personally liable for the court costs if the judgment goes against them.

DA MP Alf Lees said no matter what accounting standard the RAF uses, it is bankrupt.

Less said the RAF is in a chaotic mess, and people have not received what is due to them for many years, yet the fund is fussing about an accounting standard.

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He subsequently reported that the DA will be pursuing charges against RAF executives under the Powers, Privileges and Immunities of Parliaments and Provincial Legislatures Act of 2004 for misleading parliament by repeatedly insisting on using an accounting standard that falsifies the RAF’s current debt profile by as much as 90%.

Guilty of fraud?

Lees said courts have previously ruled that presenting false information to parliament is fraud and that by refusing to discard an accounting standard – as instructed by the AG and National Treasury – the RAF may have presented falsified financial statements to parliament on the entity’s debt profile.

He said the AG warned that the use of the accounting standard by the RAF, instead of the prescribed IFRS standard for the fund’s 2021/2022 financial year, misrepresents its financial standing and could be covering up a debt liability of R300 billion.

“There is a strong basis for charging the RAF board of directors, including the CEO, with dereliction of duty and declaring them delinquent directors under the Companies Act,” he said.

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William Murphy

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